Money Velocity is Slowing and Money Isn’t Moving

Dear Reader,

As I write this, my dad is in Spain, fighting for his life.

You should come’ read the message from my family I woke up to this morning. Three dreaded words anyone living far away from family never wants to hear.

The prospect of death and losing a loved one puts things in perspective. It changes priorities. Daily hurdles now seem trivial and unimportant.

Life is spending time with your loved ones, doing what you love. The rest is noise.

Life is short, fleeting and finite.

Life is change.

As I scribble these lines, I can´t help but think of my dad. Witty, fun and honest dad, with the knack to speak and connect with anyone.

It’s thanks to him that I’ve had a life with plenty of possibilities. That I’ve had an education and the chance to travel the world.

It’s also because of him that I developed an interest in economics. He spent his whole life working as an economist.

We’ve discussed the subject of economics aplenty together over many dinner tables.

It was during one of those chats a while back that he told me:

It doesn´t make sense anymore.’

By ‘it’, he was referring to the global economy. There’s been so much stimulus pumped into the global economy that he hardly recognises it anymore.

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Money velocity is what gets inflation going

The US Fed though is already concerned about stimulus programs losing effectiveness. As the Wall Street Journal reported this week, they are looking at a new tool:

As part of their contingency planning for the next recession, Federal Reserve officials are looking at a stimulus scheme the U.S. last used during and after World War II.

From 1942 until 1951, the Fed capped yields on Treasury securities—first on short-term bills and later on longer-term bonds—to help finance war spending and the recovery. […]

At issue is how the central bank should manage a faltering economy when short-term interest rates are already low. […]

They are also inspecting new approaches. “The law of diminishing returns is a very powerful force in economics, and so we have to be concerned that it may also apply to quantitative easing,” said Fed Vice Chairman Richard Clarida in public comments earlier this month. […]

The goals of either approach are similar: drive down longer-term interest rates to encourage new spending and investment by households and businesses.

Problem is, interest rates are already at record lows and consumers are not seeing any increases in salary. All that stimulus is not flowing into the overall economy. Instead, money is flowing into assets and stocks.

As you can see below, money velocity is at an all time low. Money velocity measures the speed at which we exchange money to buy goods and services. Money velocity is what gets inflation going.

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Source: St Louis Federal Reserve

[Click to open in a new window]

But money velocity is slowing. Money isn’t moving, it’s not changing hands. All that money from central bank stimulus is not making its way into economy to be spent. Instead it’s making its way into assets that people can hold and wait to appreciate.

This is why we are not seeing any inflation, and so much inequality.

In Europe, some are already (finally) starting to voice that this road of low and negative rates has taken us down a path with no exit.

Markets are heading higher

As Bloomberg reported recently (emphasis added):

As the European Central Bank reviews following years of radical stimulus, bank executives are stepping up calls on the monetary its strategy authority to reverse half a decade of negative interest rates.

The policy is a “distortion” and the longer it’s in place “the more the side effects become important,” UBS Group AG Chairman Axel Weber said at the World Economic Forum in Davos. Negative rates are “not a good place to be,” lamented Kees van Dijkhuizen, head of Dutch lender ABN Amro Bank NV. His counterpart at Deutsche Bank AG, Christian Sewing, was even more direct, saying the ECB “missed the exit” when growth was stronger.

Growth in developed countries has already been low, even with all this stimulus. How much worse would it have been without it? As the article continued:

Euro-area banks have paid 25 billion euros ($28 billion) to deposit funds at their central bank since June 2014, according to data compiled by Bloomberg. Societe Generale SA Chairman Lorenzo Bini Smaghi has called those charges a “tax” that hurts bank profitability because lenders are limited as to how much of it they can pass on to clients. There’s still a benefit though: ECB estimates show that without its wider policy actions, euro area real GDP would have been as much as 2.7 percentage points lower at the end of 2018.

Markets are heading higher, and there is little risk aversion.

We are living at a time when ‘cash is trash’, as hedge fund manager Ray Dalio said last week. He has been warning investors that they should get out of cash as central banks continue to print more money.

There is the thinking, that this is the new normal. That things will continue the same and that keeping up all this stimulus is sustainable. No more busts, but instead a constant upward trajectory.

But as I say, life is change and things can change in an instant…

It’s been several hours now since I got my family’s message. I’m at the airport, waiting to board a flight to Spain. On a side note, there are plenty of people wearing face masks around the airport.

My life certainly took an unexpected turn this morning.


Selva Freigedo ,
Editor, The Rum Rebellion

PS: Interest rate cuts will trigger the next global financial crisis. Here is what you should do now to protect your wealth.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion